A model for hedging load and price risk in the Texas electricity market

Coulon, Michael, Powell, Warren B and Sircar, Ronnie (2013) A model for hedging load and price risk in the Texas electricity market. Energy Economics, 40. pp. 976-988. ISSN 0140-9883

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Energy companies with commitments to meet customers’ daily electricity demands face the problem of hedging load and price risk. We propose a joint model for load and price dynamics, which is motivated by the goal of facilitating optimal hedging decisions, while also intuitively capturing the key features of the electricity market. Driven by three stochastic factors including the load process, our power price model allows for the calculation of closed-form pricing formulas for forwards and some options, products often used for hedging purposes. Making use of these results, we illustrate in a simple example the hedging benefit of these instruments, while also evaluating the performance of the model when fitted to the Texas electricity market.

Item Type: Article
Schools and Departments: School of Business, Management and Economics > Business and Management
Subjects: H Social Sciences > HD Industries. Land use. Labour > HD9000 Special industries and trades > HD9502 Energy industries. Energy policy. Fuel trade
H Social Sciences > HG Finance
Q Science > QA Mathematics > QA0273 Probabilities. Mathematical statistics
T Technology > T Technology (General) > T0055.4 Industrial engineering. Management engineering > T0057 Applied mathematics. Quantitative methods
Depositing User: Michael Coulon
Date Deposited: 19 Jul 2013 13:34
Last Modified: 07 Mar 2017 07:26
URI: http://srodev.sussex.ac.uk/id/eprint/45722

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